Extremely negative sentiment culminating Q4 2023 toward Chinese stocks have brought A shares to exceedingly low valuations for an economy with so much inherent growth potential, that it would appear the upside risks far outweigh the downside risks at this point. Meanwhile we see differentiating features of the bedrock and new economy indices including factors tilting toward bargain stocks and high-quality growth at a reasonable price, along with a concentration in strategic sectors that truly drive China’s real economy. In this article, Dr. Phillip Wool, Global Head of Research of Rayliant Global Advisors reviews the factor performance of the onshore A-shares markets in Q4 2023, and reasons why investors may look back at 2024 as a turning point for China’s equity markets, and outstanding entry point for a vintage well positioned for growth recovery in the new normal.

Surging Treasury yields and increasing anxiety over the Fed’s ‘higher for longer’ policy led global equities to ‘risk-off’ in the third quarter, though the challenge for Chinese stocks in the CSI 300 Index, down -2.9% for the quarter, remained mostly a function of negative sentiment toward China’s property market and skepticism that policymakers were doing enough to put the nation’s economic recovery back on track. Nevertheless, we saw some very positive signs in Q3, with Beijing beginning to implement targeted stimulus that, by quarter end, already appears to be bearing fruit. From a factor perspective, the new economy portfolio’s quality growth exposure is effectively levered to the upside surprises we see as significantly undervalued at this moment, while the bedrock index should continue to benefit from value and quality exposures, allowing us to identify true bargains poised for revaluation. In this article, Dr. Phillip Wool, Global Head of Research of Rayliant Global Advisors, discusses third-quarter performance and outline our expectations for China’s economy and market as 2023 draws to a close.

과거 투자자들은 중국 주식 소유시 국영기업(SOE)보단 민영기업(POE)을 더 선호했습니다. 보통 민영기업은 더 효율적으로 운영되며 성장·이익·혁신을 추구하는 경향이 있는 반면, 국영기업은 보통 관료주의, 사회적 책임, 고용·사회적 안정 지원, 그리고 변화·혁신과는 거리가 먼 전통적인 사내문화에 얽매인 채 운영된다는 고정관념이 존재했기 때문이다. 그러나 정부의 강력한 지원 뿐만 아니라, 국영기업 개혁을 촉진하고 국영기업들의 가치 발굴을 강조하는 새 정책들이 속속 등장함에 따라, 이제는 이러한 고정관념을 타파할 때가 된 것 같습니다. 변화를 위해 노력하고, 또 진정한 경제 발전에 기여할 수 있도록 재편성되고 새로운 가치를 발견할 수 있게끔 정책 결정자들의 전폭적인 지지를 받는 국영기업들이 새로이 등장하고 있기 때문입니다. 이 글에서는 최근 인기를 끌고 있는 국영기업 리레이팅/가치 재평가 테마의 배경에 대해 논의해볼 것이며, 중국 국영기업 테마에 적절한 익스포져를 갖기 위한 최적의 방법을 소개합니다.

Q1 has been an eventful start for the year 2022 where the world has experienced economic turbulence, regional conflict and continued COVID impact. United States is facing record high inflation tackled with aggressive monetary policy on interest rate hike and balance sheet reduction. We have also seen regional conflicts causing supply chain disruption in certain field such as oil and gas. In China, although in a much better inflation environment, Covid outbreak since late Q1 in Shanghai and some other cities had caused some disruption to China A share market.

2021 has been a challenging year for many, with significant divergence within the Chinese equities universe and frequent growth/ value factor rotations through each quarter. We had also experienced regulatory and policy headwind and tailwind that drove significant market movements. Since the end of 2021, China’s equity market has experienced correction which has brought valuation back to attractive level. Both our Premia CSI Caixin China New Economy ETF (3173 HK) and Premia China Bedrock Economy ETF (2803 HK) continue to provide effective diversification tools to global investors and we illustrate a 50/50 blended portfolio that would outperform the broader market and its peers consistently.

Being the first-in-first-out, China has been the first one to reopen and recover from the pandemic last year. While the recovery has been uneven and is still underway going into 2021, in Q4 we observed sector and factor rotation started to kick in, with Value and LowRisk being the best performers toward the year end.

As business activities in China mostly resume to a normal level, we also observed some mean-reversion in factor returns, and interesting rotation in sector returns. Still, China A shares continue to outperform the US and global equity markets. With “high-quality” growth emphasized by the 14th Five-Year Plan and “Dual Circulation”, we believe “Quality Growth” will continue to be the main tone of China A equities.

After the fall in Q1, global equities recovered sharply in Q2 as the COVID fear eases and stimulus packages kick in around the world. YTD, China is the best performing emerging market, and the broad CSI 300 index gained 14% in the second quarter. From factor investing perspective, we continue to see the dispersion of a two-speed-economy despite an overall beta pick up. Quality growth new economy stocks continue to be the winner.

The COVID-19 pandemic has slowed down productivity and daily lives, stagnated the global supply chain, and affected financial market returns across almost all asset classes. In the first quarter of 2020, all markets around the world reported negative returns with varying degrees. While it seems that all is going the same direction, especially in the equities’ world, the fundamental risk factors were not. Among the fundamental factors we employ for China A shares, some has performed better than others amidst the market drawdown.

The geopolitical risks that dominated global markets for much of 2019 faded in the last quarter as the US and China reaching a phase one trade deal (which happened on Jan 15th and we discussed in China: Beyond Trade Deal Phase 1). As a result, global equity markets posted gains and China A shares also performed strongly in Q4 2019 against this backdrop.FACTOR PERFORMANCEProductivity Growth was the best performing factor in Q4, followed by Quality. The two factors were the best performing factors in 2018 and they kept the trend in 2019. Value showed a slight sign of reversion in Q4 but remained the worst performing factor throughout the year.As a result, the two Premia multi-factor China A shares ETF saw different performances in 2019. Premia CSI Caixin China Bedrock Economy ETF, which is a defensive play with active Value and LowRisk exposures by design, trailed the broad CSI 300 market performance. On the other hand, Premia CSI Caixin China New Economy ETF, a quality growth play designed to capture high quality, high productive growth new economy companies, was among the top performing broad market China equity ETFs listed outside of China in the full year of 2019 with 43% total return in CNY terms (41% total return in USD).What is Quality & Productivity Growth? - To recap, the factor definitions employed in the Premia multi-factor China A shares indexes, designed by Dr. Jason Hsu’s team at Rayliant Global Advisors are as follows –· Balance Sheet Health (aka Quality in our usual definition): Debt Coverage Ratio, Cash Ratio, Net Profit Margin, negative Accruals, negative Net Operating Assets· Productivity Growth: Gross profitability, Operating Profitability, negative Change in Total Assets, negative Change in Total Book Assets, R&D expense over AssetsBoth of the two factors entail component metrics that are broadly considered as “Quality”, despite the fact that this late popular factor does not really have a commonly agreed definition compared to the widely accepted original Fama-French Size and Value. Dr. Jason Hsu recently published a paper titled “What is Quality”. The paper published in the Financial Analysts Journal won the 2019 Graham and Dodd Top Award, and for those interested can find it on SSRN.2019 was firstly a year of recovery from 2018, but also a year of P/E multiple expansion across industries. New economy sectors, in particular, had a strong year as the government continue to drive policies around its reconfiguration toward a service-oriented, consumption-led, technology first economy despite the headwinds from the US-China trade dispute, or even to a greater extent with the conflict as an alarming catalyst.Our Premia CSI Caixin China New Economy ETF (3173/9173 HK) saw active return not only in the style factors but also from such new economy industry allocation and selection compared to peer ETFs tracking the broad CSI 300 index, as shown in Figure 3.2020: VALUE MIGHT REVERT, BUT QUALITY (NEW ECONOMY) GROWTH WILL CONTINUE TO SHINEHeading into 2020, we believe the price multiple expansion would continue but at a slower speed and be more selective on sectors, especially as China further develops into a two-speed economy. From an industry perspective, new economy sectors such as technology services, advanced manufacturing, new energy and healthcare will continue to be the megatrend growth opportunities and key drivers of China’s overall economic and productivity growth in the long term. On the other hand, as earnings play a bigger role in the P/E * EPS formula for market value, sector leaders with solid profitability and earnings capabilities stand better chances to outperform. From a style factor perspective, the broad set of Quality factors are best positioned to continue generating positive risk premia. The quality growth play would remain ideal for investors looking for megatrend growth opportunities in A-shares, while allocators more concerned about potential downside risk or wish to take a contrarian approach may consider the value strategy. Further readingsChina: Beyond Trade Deal Phase 1Insights from the revenue forecast in China marketChina A Factor Review: 2019 Q3

The US-China trade dispute rumbled and concerns over global growth continued to mount in Q3. Factor-wise, Quality continued to outperform while Value is trailing, badly. Overall, the China A-shares ended roughly flat in Q3, and it was a meaningful quarter to the market with MSCI, FTSE, and S&P Dow Jones all made announcements of (further) inclusion of China A-shares into their benchmarks. Heading into Q4, we believe “Megatrends” continue to be the key investment themes and “Diversification” core to portfolio risk management. We don’t see a Value trap environment, but the comeback relies on many catalysts amid the current market uncertainties. Consolidation will happen as China rebalances to a “new normal”, and we believe Quality Growth is the best approach to capture domestic champions.

When over 30% of the investment-grade bonds are selling at a negative yield, the longest bull market in the US seems to be wobbling, global growth is decelerating and the two biggest economies are in a dispute over trade and technology, there is a need for most investors to anchor themselves in a stronghold to face the volatile markets. Benjamin Graham’s Intelligent Investor, often referenced as the best book on investing ever written, may be able to offer a bit of insight for us. At the end of the day, an intelligent investor is a realist who sells to optimists and buys from pessimists. The author has experience to back it up: Graham's personal losses in the 1929 crash and the Great Depression led him to perfect his investment techniques.

After a bull run of close to 40% that took most by surprise in the first quarter, trade uncertainties started to really weight on Chinese stocks during the second quarter of 2019. Unlike the beta-driven first quarter, all factors of our interest had positive performance in Q2 while the broad equity market ended roughly flat. But style factors alone are far from sufficient to explain (or reduce) the impact from the geopolitical shocks to the system as there had been much more intricate implications to one’s sector exposures; therefore, we also share a quick review of industry exposures in this piece.

As the issuer of world’s first two fundamental multifactor China A-shares ETFs, we look closely into the factors. The China A shares market went on a roller coaster ride since late 2018, and how about the factors – are they on the same ride or rotating around a Ferris wheel? In this piece, we re-cap the research on China A fundamental factors and share the recent observations on factor performances.